At the Berkshire Hathaway (BRK-A) annual meeting a couple of weeks ago, Chairman Warren Buffett was very enthusiastic about investing in well run banks, and even said, and I paraphrase here, that if there was one stock right now that he would put the bulk of his net worth in, it was Wells Fargo (WFC). And not surprisingly, now with Berkshire releasing its first quarter From-13F, Buffett has evidently been putting his money where his mouth is, as the conglomerate re-allocated some of its equity portfolio, and upped it’s stake in Wells, among others.
Given the continued tumult in markets during the first quarter, which created some potentially bargain prices in businesses that rarely become bargains, it appears as though Berkshire became relatively opportunistic, and added to its holdings in a number of good businesses. To pay for these added stakes, Berkshire sold some of its position in a few other businesses, two of which we have already known that Berkshire was in the process of reducing.
It is also worth noting—and as I had mentioned above—that it appears as though Berkshire has indeed re-allocated some capital among the securities it owns rather than only using new money in its portfolio. This is likely a consequence of Berkshire having a number of other cash commitments, one of which was putting capital into Swiss Re, and then also helping Dow Chemical (Dow) finance its acquisition of Rohm & Haas on April 1. In addition, Buffett’s desire to have gobs of cash on hand for insurance regulatory purposes, and to also take advantage of potentially new investment or acquisition opportunities, is likely behind some of the efforts to re-allocate the portfolio.
Increased Stakes
During the first quarter, Berkshire upped its stake in two banks that it already owned, the aforementioned Wells Fargo as well as US Bancorp (USB), both of which, in my opinion, are high on the quality scale as far as how banks are run. Berkshire also added to its stake in Johnson & Johnson (JNJ), which it had sold some of last fall to help pay for its preferred shares in General Electric (GE) and Goldman Sachs (GS). In fact, Buffett also recently said that he didn’t want to sell part of Berkshire’s J&J position, but that he wanted to have some additional cash on hand at the holding company when he made those two large preferred stock deals. Given that during the first quarter J&J’s share price declined to levels that it hadn’t seen in at least five years, it isn’t surprising, to me at least, that Berkshire bought back in.
Berkshire also continues to accumulate shares in railroads, having continued to up its position in Burlington Northern (BNI) and Union Pacific (UNP). As for the former, Berkshire owns over 20% of the firm, and over the last year has aggressively added to its position, and also wrote some put options on it, which was effectively going long the businesses. On the latter, Berkshire owns a little bit more than 2% of the business based on this most recent filing. As I’ve written about previously, it appears as though the competitive positioning of railroads vis-à-vis truckers has slowly improved, after decades of brutal competition. What is more, it appears, in my opinion, that railroads have also become somewhat more efficient with double-decker trains and being able to load containers from ships right onto rail cars. This may, or may not, have factored into Berkshire’s decision, but with the decline in economic activity over the past years, the price for railroads—and most other transportation or shipping stocks--has also declined, which may have continued to make the price for the railroads somewhat attractive to a long-term buyer like Berkshire.
Finally, Berkshire increased its stake in Nalco Holdings (NLC), which is a business that Berkshire had established a position in last quarter. Nalco is a business that provides water treatment services to its customers.
Here is a summary of the businesses that Berkshire increased its position in last quarter:
• Wells Fargo
• US Bancorp
• Burlington Northern
• Union Pacific
• Nalco Holdings
Decreased Stakes
During the first quarter Berkshire continued to reduce its position in Constellation Energy (CEG). This was not unexpected, as Berkshire’s Mid-American subsidiary attempted to purchase all of Constellation last fall, when the Baltimore utility ran into problems in its energy-trading book, and was in desperate need of a cash infusion to meet collateral calls. Ultimately Mid-American lost out on purchasing Constellation to a deal from a French utility, but as a break-up fee, Berkshire received both cash and shares in Constellation as consideration. Since then, Berkshire has been continuously selling its stake in the utility.
In Berkshire’s most recent annual report, it also indicated that it had been selling some of its position in ConocoPhillips (COP), as the purchase price of some of the lots was so high from last year, that those lots were deemed to be permanently impaired by accounting tests. As such, Berkshire sold some of its stake in Conoco, which also created substantial tax losses, which should help to shield some of Berkshire’s future gains from taxes.
The two decreases that were not disclosed until the filing of this most recent Form 13-F were Berkshire’s position in used car retailer Carmax (KMX), as well as its stake in managed care company, UnitedHealth Group (UNH). In my opinion, Carmax is a business that recently has struggled with declining inventory values of used cars as well as the effective closing of some securitization markets. That said, Carmax could also benefit from the recent large automaker dealer closings, which longer-term, could allow Carmax gain share in the used car market. As of the first quarter filing, Berkshire still had a substantial stake in Carmax, but this is the second quarter in a row where Berkshire has trimmed its position in the business.
As for UnitedHealth, the managed care company continues to struggle with declining enrollments thanks to higher unemployment, and will likely continues to be caught in the cross-hairs, as the government seeks to restructure the health care industry. Similar to Carmax, this is the second quarter in a row that Berkshire has reduced its position in UnitedHealth.
Here is a summary of the businesses that Berkshire decreased its position in last quarter:
• Constellation Energy
• ConocoPhillips
• Carmax
• UnitedHealth Group
Unchanged Positions
Despite the activity above, the bulk of Berkshire’s equity portfolio was unchanged from last quarter, and I’ve listed below those positions that Berkshire continues to own based on its most recent Form 13-F.
• American Express (AXP)
• Bank of America (BAC)
• Coca-Cola (KO)
• Comcast (CMCSA)
• Comdisco (CDCO)
• Costco (COST)
• Eaton (ETN)
• Gannett (GCI)
• General Electric (GE)
• GlaxoSmithKline (GSK)
• Home Depot (HD)
• Ingersoll-Rand (IR)
• Iron Mountain (IRM)
• Kraft (KFT)
• Lowes (LOW)
• M&T Bank (MTB)
• Moodys (MCO)
• Nike (NKE)
• Norfolk Southern (NSC)
• NRG Energy (NRG)
• Procter & Gamble (PG)
• Sanofi-Aventis (SNY)
• SunTrust Bank (STI)
• Torchmark (TMK)
• United States Gypsum (USG)
• UPS (UPS)
• Wabco Holdings (WBC)
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wellpoint (WLP)
• Wesco Financial (WSC)
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at buffettinsights@gmail.com.
Justin
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The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
